After profiting from the crash, hedge fund manager bets on recovery

Hedge fund manager John Paulson is betting that the foreclosure crisis won't get as bad as many fear -- at least not for homeowners most able to pay off their mortgages.

Paulson famously made billions of dollars on prescient wagers that the bubble in U.S. home values would burst, decimating the value of securities linked to subprime mortgages. Now he's putting his money on housing again -- but this time he thinks bonds backed by home loans to sound borrowers are too cheap to resist.

"We've been adding pretty steadily to our long distressed positions," an executive at Paulson & Co., his fund company, said at a conference in Hong Kong, Bloomberg News reported. "Where we shorted the lower quality subprime securitizations, we're now going long the better quality jumbo, prime securitizations."

In other words, as the housing bubble began to burst, Paulson's firm borrowed bonds backed by subprime mortgages and sold them to other investors. When the value of those bonds fell, it bought them back at a much lower price and kept the difference.

Now Paulson evidently believes that some bonds backed by high-quality home loans have gotten too cheap because of fears that borrowers could default. By investing in these bonds, he's gambling that fewer of those borrowers will fall behind or stop paying than other investors think. Put simply, the strategy suggests Paulson doesn't believe the foreclosure crisis will be as bad as a lot of other people do.

Of course, past performance does not predict future results. So Paulson may have been right about the bubble's bursting, but that doesn't mean he's going to be right again this time. Still, his strategy will probably draw a fair amount of attention.

Mortgage-backed bonds aren't the only distressed assets Paulson's firm is investing in, according to Bloomberg News. He's also buying the debt of banks and other financial companies that are receiving government bailouts. That's another bet that markets are wrong about how bad things will get.